In 1993. the economic outlook for Mexico was rosy. NAFTA was recently approved by the U.S. Congress and about to take effect. Mexico's economy was rebounding from the "lost decade" of the 1980s caused by the collapse of oil prices, and open trade with the United States was expected to entice foreign investors to take advantage of Mexico's privileged access to the U.S. market. In addition, the Mexican government had recently implemented a series of financial reforms including a restructuring of their foreign debt. Yet, there were thorns to deal with. Mexico's deficit had ballooned to more than $20 billion or seven percent of GDP. This led some observers to worry that the peso was becoming overvalued. To maintain the peso's value, Mexico's central bank, Banco de México used an exchange rate to peg the peso to the U.S. dollar through short-term public debt instruments in U.S. dollars and the foreign exchange market. This caused the peso to appreciate, but speculators began to recognize that the peso was artificially over-valued and sent their capital out of Mexico. Eventually, the plan failed and the central bank's foreign exchange reserves dwindled until it completely ran out of the U.S. dollar in December 1994. On December 22nd, the Mexican government allowed the peso to float and it spiraled downward losing 50% in four months.
President Bill Clinton saw this crisis as a matter of national security. In his 1995, State of the Union Address, Clinton linked the stabilization of Mexico to the security of American jobs, American exports and America's borders. And, with this mindset, President Bill Clinton called a meeting with his newly confirmed Treasury Secretary Robert Rubin, Alan Greenspan the Federal Reserve Chairman, and Under Secretary for the Treasury Larry Summers to discuss an American response. Motivated in large part by fear of a potential surge in illegal immigration, Clinton sought Congressional approval for $50 million bailout of Mexico. Clinton's plan was to use the International Monetary Fund (IMF) to administer the bail out with $20 billion coming from the United States, and the rest from IMF and a consortium of Latin American Nations and Canada. In 1995, President Bill Clinton used his State of the Union address to urge Congress to take action. He emphasized, that it was not a bailout, but rather the "right thing for America". And, in his address he directly linked it to national security, stating that "our security still depends upon our continued world leadership for peace and freedom and democracy". If America wanted to secure it's borders, "then we must pass the stabilization program".
"Much of what the American people are thinking about tonight is what we've already talked about. A lot of people think that the security concerns of America today are entirely internal to our borders. They relate to the security of our jobs and our homes and our incomes and our children, our streets, our health, and protecting those borders. Now that the cold war has passed, it's tempting to believe that all the security issues, with the possible exception of trade, reside here at home. But it's not so. Our security still depends upon our continued world leadership for peace and freedom and democracy. We still can't be strong at home unless we're strong abroad.Congress refused to enact the Mexican Stabilization Act, and the Clinton administration took executive action to authorize the Treasury Department to issue a loan through the Exchange Stabilization Fund. Republican leaders were up in arms viewing this in the words of Pat Buchanan, a "daylight robbery of the nation's wealth". Republicans argued that this arrangement, along with the greater vision of a global economy under NAFTA would lead to unacceptable trade deficits for America and a loss of U.S. jobs.
The financial crisis in Mexico is a case in point. I know it's not popular to say it tonight, but we have to act, not for the Mexican people but for the sake of the millions of Americans whose livelihoods are tied to Mexico's wellbeing. If we want to secure American jobs, preserve American exports, safeguard America's borders, then we must pass the stabilization program and help to put Mexico back on track.
Now let me repeat: It's not a loan. It's not foreign aid. It's not a bailout. We will be given a guarantee like cosigning a note, with good collateral that will cover our risks. This legislation is the right thing for America. That's why the bipartisan leadership has supported it. And I hope you in Congress will pass it quickly. It is in our interest, and we can explain it to the American people because we're going to do it in the right way."
This was a huge risk for Clinton, and if failed it could doom his presidency. But, within 2 years Mexico was able to pay off the loan along with $500 million in interest. For the moment, it looked as though President Clinton had taken the right action and saved the day. Unfortunately for Mexico, the damage was only done and they would see many more years of financial stress. In 1995, Mexico's real wages fell by 25-35% and unemployment climbed to 7.4%. It took another 6 years before the nation's poverty level returned to normal.
http://www.presidency.ucsb.edu/ws/index.php?pid=51634
https://www.frbatlanta.org/-/media/Documents/filelegacydocs/Jwhi811.pdf
https://en.wikipedia.org/wiki/Mexican_peso_crisis
http://www.history.com/this-day-in-history/clinton-authorizes-loan-to-mexico
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